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One Country Primed to Soar in the Draghi Asset Bubble

By Brett Eversole
Monday, September 8, 2014

The Draghi Asset Bubble is here...
 
As regular DailyWealth readers know, we've been telling you about the opportunity in European stocks for more than two years... and about what my colleague Steve Sjuggerud has coined the "Draghi Asset Bubble" since last December.
 
In short, European Central Bank President Mario Draghi is cutting interest rates across the board. He also just announced plans to buy private-sector assets... a similar plan to the massive quantitative easing (QE) we've seen in the U.S.
 
All of this points to one thing... higher European stock prices.
 
But there's one European country that looks especially attractive to us right now...
 
This country has a rare, but profitable setup in place today. And history shows it'll likely lead to a quick double-digit bounce in prices.
 
Let me explain...
 
The big winner in Europe could be Italy...
 
That might surprise you. After all, Italy has been one of the weaker European economies since the 2008-2009 global financial crisis.
 
The country posted -0.3% gross domestic product (GDP) in the second quarter... its 11th negative reading in a row.
 
But bad headlines and a weak economy are actually a good thing today. The reason is simple... the bad news has forced investors out. No one is interested. And based on history, that gives us a safe opportunity to profit.
 
We can see this negative sentiment by looking at the shares outstanding of the major Italy exchange-traded fund (ETF) – the iShares MSCI Italy Fund (EWI).
 
Exchange-traded funds like EWI create and liquidate shares based on demand. The total shares outstanding fluctuate depending on whether more investors are buying or selling.
 
When shares outstanding fall, it means investors aren't interested. And that's exactly what we're seeing today...
 
Shares outstanding of EWI are down 20% over the last month... Historically, that gives us a great chance to profit.
 
You see, 20%-plus falls in shares outstanding don't happen often. In the case of EWI, it has only occurred four other times since 2010. And buying after these declines led to quick gains. Take a look...
 
iShares MSCI Italy Fund (EWI)   
Investors lose interest
Stocks Peak
Time (in months)
Return
5/19/2010
8/3/2010
2.5
18.3%
10/25/2010
11/4/2010
0.3
2.8%
1/6/2011
4/29/2011
3.7
24.6%
11/2/2011
3/19/2012
4.5
10.5%
Average
2.6% 13.1%

As you can see, buying after a 20%-plus fall in EWI shares outstanding led to 13% gains over the next 2.6 months, on average.
 
Shares of EWI crashed nearly 20% in June and July, sparking this massive shares-outstanding decline. But EWI is already recovering. The fund is up 8% in the last few weeks. But shares outstanding haven't turned around yet.
 
That shows that we still have plenty of upside left... And we have what could be a new uptrend on our side. But it's a little too early to tell.
 
Mario Draghi is doing everything he can to boost stock prices in Europe. With investors fleeing, but prices beginning to move higher, history shows Italy could be the big winner.
 
It's a bet worth considering today. 

Good investing,
 
Brett Eversole




Further Reading:

Steve recently showed readers his favorite way to invest in Europe right now. "One simple investment will give us all of the upside of European stocks," he writes... and "protection from any falls in the euro." Learn Steve's favorite way to make the trade here.
 
Brett also likes the prospects in another cheap foreign market. "No one's paying attention," he writes. "But one of the world's cheapest stock markets has entered a stealth bull market." Get all the details right here.

Market Notes


NEW HIGHS OF NOTE LAST WEEK
 
iShares Basic Materials Fund (IYM)… resource stocks
iShares Global Clean Energy Fund (ICLN)… clean energy stocks
iShares PHLX Semiconductor Fund (SOXX)… semiconductor stocks
iShares U.S. Consumer Goods (IYC)… consumer-spending stocks
iShares Transportation Average (IYT)… transportation stocks
iShares Dow Jones U.S. Insurance Fund (IAK)… insurance stocks
iShares China Large Cap Fund (FXI)… Chinese stocks
iShares MSCI Mexico Fund (EWW)… Mexican stocks
iShares MSCI Latin America Fund (EEML)… Latin American stocks
iShares Australia Fund (EWA)… Australian stocks
iShares South Africa Fund (EZA)… South African stocks
iShares Canada Fund (EWC)… Canadian stocks
PowerShares QQQ Fund (QQQ)… Big Cheap Tech
PowerShares Buyback Achievers Fund (PKW)… Stealth Dividends
WisdomTree India Earnings Fund (EPI)… Indian stocks
WisdomTree Middle East Dividend Fund (GULF)… Middle East stocks
First Trust NASDAQ Rising Dividend Achievers ETF (RDVY)… Dividend Aristocrats
Health Care Select SPDR Fund (XLV)… health care stocks
JPMorgan Alerian MLP Index Fund (AMJ)… MLPs
Vanguard Russell 3000 Index Fund (VTHR)… small-cap stocks

NEW LOWS OF NOTE LAST WEEK
 
Not many... it's a bull market!

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